Report to Convocation
September 21, 2000*
Multi-Disciplinary Practice Task Force
Purpose of Report: Decision
Prepared by the Multi-Disciplinary Practice Task Force
TABLE OF CONTENTS
EXECUTIVE SUMMARY . . . i
I. MANDATE . . . 1
II. BACKGROUND TO THE STUDY . . . 2
III. OUTLINE OF THE TASK FORCE’S WORK . . . 3
IV. NATURE OF THE AFFILIATED LAW FIRM . . . 5
AFFILIATED LAW FIRM DEVELOPMENT . . . 5
Recent Consideration of the Affiliated Law Firm Structure . . . 7
New York State Bar Association . . . 7
The American Bar Association . . . 8
Law Society of England and Wales . . . 10
Law Society of Scotland . . . 11
Law Society of British Columbia . . . 11
IMPETUS FOR THE AFFILIATED LAW FIRM . . . 12
DONAHUE & PARTNERS . . . 17
The Firm’s Philosophy . . . 17
The Firm’s Practice . . . 18
E&Y . . . 18
The Global Law Practice . . . 19
Donahue’s Partnership Structure, Financial Issues, and Relationship to E&Y . . . 19
Confidentiality . . . 19
Conflicts of Interest . . . 19
Control of the Law Firm . . . 20
Financial Arrangements . . . 20
The Offices . . . 20
Comments on Regulation of Lawyers in Affiliated Law Firms . . . 20
V. ANALYSIS . . . 21
DEFINING THE AFFILIATED FIRM . . . 21
THE TASK FORCE’S APPROACH TO A REGULATORY RESPONSE . . . 23
The Public Interest . . . 23
A Regulatory Approach . . . 24
ISSUES THE AFFILIATED LAW FIRM STRUCTURE RAISES FOR THE PUBLIC AND THE PROFESSION . . . 27
EXAMINATION OF THE ISSUES . . . 28
A. Independence . . . 28
Control of the Law Firm . . . 29
Imputation of Conflicts . . . 35
Conflicts in the Context of Legal Services to Audit Clients . . 36
C. Confidentiality and Solicitor and Client Privilege . . . 37
The “Cross-Over” Lawyer . . . 39
D. Malpractice Issues . . . 40
E. Effective Regulation of the Affiliated Law Firm . . . 41
Firm Name . . . 41
Billing Clients . . . 41
Trust Funds . . . 42
Impact on the Rules of Professional Conduct . . . 42
VI. SUMMARY AND CONCLUSIONS . . . 44
THE TASK FORCE’S PROPOSALS . . . 46
VII. DECISION FOR CONVOCATION . . . 48
APPENDIX 1 - BY-LAW 25 . . . 49
APPENDIX 2 - “THE AFFILIATED OR “CAPTIVE” LAW FIRM” . . . 65
APPENDIX 3 - AMERICAN BAR ASSOCIATION RECOMMENDATION IN RESPECT OF MULTIDISCIPLINARY PRACTICE . . . 71
APPENDIX 4 - AMERICAN BAR ASSOCIATION COMMISSION ON MULTIDISCIPLINARY PRACTICE - TESTIMONY GERARD NICOLAY AND NEIL COCHRAN . . . 76
EXECUTIVE SUMMARY
Mandate
In June, 1999 Convocation assigned to the Multi-Disciplinary Practice Task Force (“the Task Force”) the mandate to “deal with the issue of a captive law firm model, to study, amongst other things, the questions of control, trading style, management, conflicts of interest and related matters as recommended”. The Task Force’s mandate arose from Convocation’s consideration and adoption of an earlier report on multi-discipline practices in September 1998. In Convocation’s view, the structure raised issues discrete from the study of an integrated partnership model, which was the focus of that study, and it authorized a separate Task Force to study those issues.
The Task Force is chaired by Earl A. Cherniak Q. C., and its members are Larry Banack, Kim A. Carpenter-Gunn, W. Niels Ortved, and David A. Ward Q. C. (non-bencher member). George D. Hunter also served on the Task Force until June, 2000. Jim Varro acted as secretary to the Task Force.
Nature of the Affiliated Law Firm and Recent Developments
The affiliated law firm is generally understood to be a law firm separate from but affiliated with another professional services entity, such as an accounting or professional services firm, for the purposes of joint marketing and delivery of professional services. The firms in the affiliation may, to varying degrees, share physical office space and information systems and equipment, and the associated costs. It is understood that the practices of the law firm and the professional services firm, however, are not integrated. The only example of an affiliated law firm to date in Canada of which the Task Force is aware is Donahue & Partners, established in 1996 and affiliated with Ernst & Young. As an operational affiliated law firm, Donahue & Partners understandably was an important focus of the Task Force’s review.
The Task Force noted recent studies and reports from a number of other jurisdictions on the subject of multi-discipline practices that dealt with the issue of the affiliated law firm. These included reports from
C The New York State Bar Association (“NYSBA”) (April 2000), which proposed amendments to its Code of Professional Responsibility to require that the relationships like affiliations between lawyers and non-lawyers be limited to other professionals, require that the law firm maintain control of the practice of law, and provide that costs and expenses may be allocated
between the lawyers and non-lawyers pursuant to the contractual relationship that governs the affiliation.
C The American Bar Association (“ABA”) (July 2000), whose recommendation adopted by the House of Delegates in July 2000 included a resolution that the Model Rules of Professional Conduct be reviewed and amendments made to assure that there are safeguards for the protection of the profession’s core values relating to strategic alliances and other contractual relationships with nonlegal professional service providers.
C The Law Society of England and Wales (July 2000), which proposed two models as “interim solutions” to the multi-discipline practice question, one similar to the Law Society of Upper Canada’s By-Law 25 scheme, and the other the affiliated law firm model with fee sharing. C The Law Society of Scotland (January 2000), whose report, approved in June of this year,
banning multi-discipline practices included the following statement on a structure that appears to be like the affiliated law firm:
...So long as it is clear to the client at all times the nature, qualifications, and function of the individual professional adviser with whom he is dealing, we see no difficulty in Solicitors sharing [with non-solicitors] premises, computers and other information technology (with appropriate security measures), and even administrative and secretarial support staff.
C The Law Society of British Columbia (June 2000), which commented on the affiliated law firm issue by acknowledging, like Ontario, that that structure raises questions apart from a regulatory scheme for multi-discipline practices where lawyers and non-lawyers seek to integrate their practices, and agreed that the issue should be addressed after separate investigation.
Impetus for the Affiliated Law Firm
In the Society’s 1998 report on multi-discipline practices, “one-stop shopping” was noted as a term used by proponents of multi-discipline practices to capture the essence of integrated service offerings. The inefficiencies of separate and independent practices to address clients’ complex problems were cited in contrast to the efficiencies that were said to be attainable by integration of legal and non-legal services, which also purported to include cost savings and enhanced advice. There is a view that the impetus for the affiliated law firm is simply a strategy on the part of professional services firms to expand their range of service offerings to include legal services and to promote the legal services as having the benefit of one-stop shopping, while acting for any clients
attracted, whether or not they are attracted by the other service offerings of the professional services firm.
In the course of consultations with a number of lawyers working in different practice and employment situations, the Task Force received varying opinions on the demand for the affiliated law firm as a desired structure for the delivery of legal services. Based on this information, it is far from clear that a demand by clients initiated multi-discipline practice developments or in particular the affiliated law firm structure.
Whether or not a demand exists for the affiliated law firm, the important question for the Law Society is what regulation is required, if any, to ensure that the affiliated law firm operates in a manner that protects the core values of the profession in the public interest. In this respect, the Task Force recognizes that there is an important difference between what the public is interested in and what is in the public interest.
Donahue & Partners
The Task Force, through a meeting with and submissions by representatives from Donahue & Partners and Ernst & Young and follow up communications, obtained information about the structure and operation of Donahue & Partners. The following briefly summarizes the non-confidential information the Task Force received orally and in writing from the law firm and Ernst & Young in response to a series of questions provided to the firms by the Task Force. In the following section, Donahue & Partners is referred to as “Donahue”, and Ernst & Young is referred to as “E&Y”. C Donahue offers a broad range of business law services. The firm does not have a litigation
department, except for specialized litigation services in such areas as tax and employment law. There are no arrangements requiring E&Y to refer its clients to Donahue or vice versa. In dealing with clients, the relationship between Donahue and E&Y is explained to clients. Donahue clients are billed by Donahue for the services which it provides. E&Y bills its own clients directly.
C E&Y Canada is a member of E&Y International, Ltd., an “umbrella organization” in which each firm of E&Y, including Donahue, is a member. Donahue pays annual membership dues to E&Y International. There are multiple partnerships in the E&Y organization, but Donahue is a separate partnership.
C With respect to financial arrangements between Donahue and E&Y, certain operating expenses are shared and are calculated on a cost basis.
C Generally, Donahue has established confidentiality procedures which restrict access to Donahue files, prevent access by E&Y to the Donahue client list, and ensure that the confidentiality of both word-processing and accounting systems is protected.
C Generally, Donahue has established a system to conduct a search of Donahue’s client list and that of E&Y on a Canada-wide basis for the purpose of conflicts of interest that includes steps to protect client confidences.
C With respect to the control or management of Donahue by E&Y, Donahue is structured as a separate partnership. Professional matters relating to the practise of law and the conduct of the practise of law are controlled by Donahue.
C No person other than a Donahue partner participates in the firm income of Donahue. There is no arrangement or practice between Donahue and E&Y for the sharing of a fee charged by Donahue to a client. There are also no referral fees.
C Donahue indicated that the desired financial arrangement between Donahue and the E&Y entities would be to allow profits to be pooled and distributed to those who are partners in the various entities.
C Physically, Donahue has its own dedicated floor and a portion of a contiguous floor adjacent to a real estate consulting practice conducted by E&Y in the Ernst & Young Tower, Toronto. Donahue has its own reception area on the 17th floor of that building.
Analysis Defining the Affiliated Firm
The Task Force concluded that the affiliated law firm is a structure that falls outside of By-Law 25 and the model it articulates for multi-discipline practices, including partnerships. In the Task Force’s view, an affiliated law firm is one that regularly advertises, solicits or promotes itself jointly with a non-lawyer firm for the offering of legal services and the services of that firm to third parties. While the law firm is an entity separate from the non-lawyer firm and is not controlled by it, the law firm becomes an affiliated firm when services of both firms are regularly offered on a joint basis. Accordingly, the Task Force, for the purposes of this report, proposes the following definition of the affiliated law firm:
A law firm has an affiliation with a non-lawyer firm where the firms regularly join together for the joint promotion and delivery of their respective services to the public.
In 1998, the Law Society decided upon a model for multi-discipline practice reflected in By-Law 25 that recognized that the core values of the legal profession would be at risk in a partnership with non-lawyers that was not fully subject to the authority and oversight of the Law Society. The policy report which laid the groundwork for that model was clear in its conclusion that the public interest should lead, rather than follow, the regulator’s efforts to design an appropriate scheme for multi-discipline practice that includes legal services. The same focus on the public interest has formed the foundation for the Task Force’s views on a regulatory response to the affiliated law firm phenomenon. In determining an approach to the regulation of affiliated law firms, the Task Force proceeded on the basis that there should be no per se prohibition of such firms. It determined, however, that any regulatory scheme for affiliated law firms, to be consistent with the principle underlying By-Law 25, should ensure that the affiliation between the law firm and the firm of non-lawyers does not create, in effect, a single partnership in violation of By-Law 25.
The Task Force’s view is that because of the legal profession’s unique role among professional service providers, the relationships between the affiliated law firm and the non-lawyer entity create the potential for an effect on the core values of the profession. These core values may be summarized as
C independence of the profession and of professional advice to clients, C solicitor and client privilege, and
C the conflict of interest regime governing lawyers in their professional practices.
Where a law firm is affiliated with a firm of non-lawyers and services are provided jointly by the two firms for a client of the law firm on a “seamless” basis, in the view of the Task Force, the legal regulator, acting in the public interest, must be satisfied that lawyer’s services provided to clients of the law firm in the context of the integration with other professional or advisory services will nonetheless respect and reflect the core values. Because there is the possibility of risk to the these values as a result of such integration, there is a need for appropriate regulation.
Issues the Affiliated Law Firm Structure Raises For the Public and the Profession
The Task Force believes that the same regulatory issues that are impacted in the multi-discipline partnership setting are “live” in the affiliated law firm. The Task Force identified the following to be the issues that, in the public interest, would require consideration:
a. Independence b. Conflicts of interest
c. Confidentiality and solicitor and client privilege d. Malpractice coverage
e. Effective regulation Examination of the Issues A. Independence
Independence for the individual lawyer is manifested in adherence to a duty ultimately and solely to the client. The lawyer must be independent of outside influences in giving advice to clients. The Task Force concluded that lawyer independence is at risk of being compromised in an affiliated law firm. For example, there is a danger of a loss of independence by a law firm that recommends a professional services firm with which the law firm is affiliated to perform certain services when the law firm expects reciprocal work from the professional services firm as a quid pro quo, or if the law firm, or its partners, share in revenues or profits of the professional services firm.
Control of the Law Practice
The independence of the lawyers in the affiliated law firm, and more broadly, the independence of the legal profession necessary to fulfill its role in our system of justice, requires that control and therefore ownership of the affiliated law firm remain with lawyers. Control is related to the aspect of independence that requires that there be uninfluenced advice from lawyers to clients.
The Task Force believes that in order to be consistent with the fundamental principles reflected in By-Law 25, the affiliated law firm must be de facto and de jure controlled by lawyers so that the Society can regulate the lawyers in the public interest. De facto control can only be determined on a case by case basis. In such circumstances, as a condition of operating as an affiliated law firm, there should be disclosure to the Law Society of the relationships, financial arrangements and other arrangements, including those in respect of the management and control of the law firm, between the affiliated law firm and the non-lawyer firm. Second, it should be a requirement that lawyers in the affiliated law firm disclose all facts affecting their independence to clients. For example, where a professional services firm with which a law firm is affiliated is pooling profits of all its related entities, including the law practice and the partners of each firm have the ability to share in those profits, there is a risk of interference with the lawyers’ independence.
1
Rule 2.08(9) reads: A lawyer shall not
(a) directly or indirectly share, split, or divide his or her fees with any person who is not a lawyer, or
(b) give any financial or other reward to any person who is not a lawyer for the referral of clients or client matters.
The Task Force felt that such relationships should be disclosed at the time of retaining the affiliated law firm to clients whose work crosses over both firms, and that rule 6.04 of the Society’s Rules of Professional Conduct, which requires lawyers to maintain independent judgment related to legal services notwithstanding involvement in other ventures or businesses, should be amended to encompass this obligation. The disclosure document itself should disclose fully to clients the law firm’s relationship with the non-lawyer firm, the “connections” between the two firms, the fact of the separation for regulatory purposes, and any other participation of the lawyers in the non-lawyer firm, as partners and as service providers, as the case may be. Disclosure to clients would only be necessary where the non-lawyer firm provides services to the client of the firm such as where the firms are working together providing or offering to provide joint services to the client.
To ensure the integrity of the lawyers’ control of the affiliated firm, the Task Force determined that an appropriate application process should be designed allowing the Society to see all arrangements and agreements with respect to control, ownership, management and fee or profit sharing, to determine, for example, whether the management of the firm’s legal practice is controlled by lawyers, and whether law firm profits are shared, directly or indirectly, with non-lawyers.
Non-lawyers Sharing in Law Firm Profits
The Society’s Rules of Professional Conduct prohibit fee sharing between lawyers and non-lawyers.1 Fees necessarily are included in profits, as profits are that part of fees remaining after deducting expenses. The Task Force was of the view that non-lawyers should not share in the affiliated law firm’s profits. Such sharing would also violate the object and spirit of By-Law 25 as the lawyers and non-lawyers are not and must not be partners in a law firm controlled by the lawyers unless By-Law 25 is complied with.
The non-lawyer firm should not be permitted to share indirectly in either the law firm’s profits or revenues whether the sharing takes the form of an inter-firm charges for office space, financing or services at an amount not in accordance with the fair market value of the space, financing or services
or by any other means. The Task Force determined, however, that appropriate cost sharing would be acceptable. As long as the cost sharing does not result in de facto control by the non-lawyer firm or amount to profit sharing, the cost sharing should be permitted at no more than cost plus a profit that does not exceed reasonable compensation.
B. Conflicts of Interest
The Task Force began with the premise that the law firm and the non-lawyer firm are separate, but are parties to an arrangement that has the potential for conflicts of interest.
The Task Force is of the view that the Society, acting in the public interest, must ensure that “cross-over” clients of the affiliated law firm are protected through disclosure of the affiliation and its effect in terms of work referred from and to the law firm, and of any interests of the lawyers in the non-lawyer firm or its related partnerships or entities as the case may be, as discussed above in the section on independence.
The Task Force was of the view that preservation of the integrity of the lawyer’s conflicts regime would mean that the two affiliated firms, based on the definition of the affiliated law firm that the Task Force proposes, should be considered as one firm for the purposes of legal conflicts. Accordingly, the Task Force believes that the lawyers in the affiliated law firm should be required to establish a system to search for conflicts in each firm and agree with the Society to deal with conflicts as if both firms were one, applying to conflict situations the obligations applicable to law firms. The Task Force also believes that the Society should impose a requirement that does not permit lawyers to affiliate with a firm of non-lawyers unless the lawyers have the ability to search for conflicts as outlined above and perform the search. Access to information in the non-lawyer firm would be necessary to properly search for conflicts.
C. Confidentiality and Solicitor and Client Privilege
Where there is an affiliation as described in the report, there should be essentially no physical or electronic access by individuals in the non-lawyer firm to the offices and files of the law firm. Policies should be established about the need for all members of both entities to observe the importance of the confidentiality regime on the legal side.
There may still be risks, however, to the confidentiality of client information. The fact of the affiliation of the firms alone creates a risk that confidential information may inadvertently be disclosed. The
risks may be heightened in an environment where a law practice is affiliated with an accounting and auditing practice because as a matter of professional responsibility, the accountant’s and auditor’s obligations vary considerably from those of the lawyer with respect to the confidentiality of certain client information.
The Task Force concluded that to preserve client confidentiality and privilege, the law firm must carry on its practice entirely within its own separate premises and maintain its documents, records and files, including all electronic data, entirely separate and apart from the files and electronic data of the non-lawyer firm. Those premises could be, of course, in the same building or in close proximity to the non-lawyer firm, to optimize cost sharing.
In addition to requiring appropriate separation both physically and operationally of the law firm and the non-lawyer firm, it should be a requirement that the law firm obtain the informed written consent of a client in any matter after the client has been advised of the possible prejudice to or loss of solicitor and client privilege arising from the working together of both firms on the same matters in respect of which legal advice will be sought and obtained by the client, or where non-lawyer staff of the non-lawyer firm also provide services, including support services, in the affiliated law firm.. Another issue bearing on the question of privilege arises when lawyers move between the law firm and the non-lawyer firm, for example, a professional services entity in providing legal advice to clients on one hand and professional consulting services on the other, for instance, in the tax area. This “cross-over” may impact on solicitor and client privilege and the ability to determine the role of the individual lawyer at a particular point in time, and on the Society’s regulation of the conduct of such a person when there is no physical indication when he or she has made a move between the firms. The Task Force was of the view that prohibiting the movement of lawyers between the affiliated law firm and the non-lawyer firm was not practicable and would be an unnecessarily strict regulatory requirement. The Task Force believes that disclosure should serve to provide clients with the information they need to decide the manner in which they wish to receive advice from lawyers who move between the firms.
The Task Force, in noting that the lawyer in the affiliated law firm would be covered to the extent that he or she is providing legal services, considered whether the cross-over issue discussed above created a problem from a coverage perspective. The question is who is behind the individual giving the advice. The Task Force considered whether it would be appropriate to have law firms only affiliate with firms of non-lawyers who are insured. While the Task Force acknowledged the public interest element to this issue, it did not conclude that it was the responsibility of the Society to ensure that the non-lawyer firm would have particular coverage.
E. Effective Regulation of the Affiliated Law Firm
The discussion above on independence, control, conflicts, confidentiality and privilege has included suggestions for certain aspects of a regulatory scheme for the affiliated law firm. Other issues leading to additional components of a regulatory scheme for the affiliated law firm are addressed below.
Firm Name
The Task Force concluded that there was no reason to amend the current rule on firm names, which generally requires that the law firm name only include the names of Canadian lawyers now or formerly with the firm. It would be misleading to include in the affiliated law firm name a brand name of a non-lawyer entity, because that would lead the public to think that that entity is practicing law or entitled to practice law. Maintaining the current rule will avoid that confusion.
Billing Clients
The Task Force concluded that as the affiliated firms are independent, and as long as the affiliated law firm provides an account for its services which is passed on as a disbursement, that would be an acceptable. The non-lawyer firm in these circumstances should not bill for legal services without showing that the bill came from the separate law firm.
Trust Funds
The regular signing authority for lawyers would apply in an affiliated law firm. If the non-lawyer entity holds client’s property, as the lawyers do not control it, the Task force concluded that this would not be a matter of Law Society regulation.
The Task Force has referenced some of the Rules of Professional Conduct, to the extent that they are impacted by the proposals of the Task Force’s proposed scheme for regulation of the affiliated law firm. In addition to those already mentioned, the following rules may require amendment to either accommodate features of the regulatory scheme proposed or to create more definitive guidance in respect of certain issues dealt with in the scheme:
(a) Rule 2.03 - Confidentiality
(b) Rule 2.03 - Avoidance of Conflicts of Interest (c) Rule 2.08(9) - Division of Fees
(d) Rule 2.09(7)(d) - Mandatory Withdrawal (e) Rule 3.02 - Law Firm Name
(f) Rule 3.03 - Letterhead (g) Rule 3.04 - Advertising (h) Rule 5.01(3) - Delegation
The Task Force’s Proposals
The Task Force believes the affiliated law firm, properly structured and regulated, should be considered as an acceptable vehicle for the delivery of legal services. However, because there is a potential risk to the independence of legal advice free of conflicting interests, and the client should be informed as to the facts so that the he or she can choose appropriate counsel, a regulatory response is warranted that seeks to preserve the fundamental nature of legal advice to clients. The Task Force proposes that
a. the affiliated law firm be defined in the following terms:
A law firm has an affiliation with a non-lawyer firm where the firms regularly join together for the joint promotion and delivery of their respective services to the public.
b. affiliated law firms must be owned and controlled by lawyers,
c. as a matter of assuring control, lawyers in affiliated law firms, as a condition of practice, should be required to disclose fully and completely to the Law Society
i. all financial arrangements that exist between the affiliated law firm and its partners and the non-lawyer firm with which they are affiliated, and
ii. all agreements and other arrangements that exist between the law firm and the non-lawyer firm with which it is affiliated including those dealing with the management and control of the affiliated law firm,
d. lawyers in affiliated law firms should be required to make disclosure to clients who retain the affiliated law firm and the non-lawyer firm for the joint provision of services or who are the subject of referral for services between the firms of any arrangements, including those described above in c., that may affect the independence of the lawyer’s representation, to permit an informed decision by the client about the retainer,
e. to facilitate the above, an appropriate application process should be designed whereby information necessary for the Society’s review of the arrangements described may be obtained,
f. the non-lawyer firm should not be permitted to share in the law firm’s profits or revenues, either directly or indirectly through excessive inter-firm charges, for example, by charging inter-firm expenses that do not reflect their fair market value,
g. an affiliated law firm should be required to establish a system to search for conflicts in both the affiliated law firm and the non-lawyer firm and should be required to deal with conflicts as if both firms were one, applying to conflicts situations the obligations applicable to law firms,
h. the conflicts search regime should, when appropriate, extend to searches for conflicts in firms affiliated with the law firm that practice outside Canada in circumstances where separate national firms or offices of the non-lawyer firm are treated economically as if they were one firm,
i. the affiliated law firm should be required to carry on its practice entirely within its own separate premises and maintain its documents, records and files, including all electronic data, entirely separate and apart from the files, documents, records and electronic data of the affiliated firm,
j. lawyers in affiliated law firms should be required to obtain the informed written consent of the client in any matter where joint services are offered by the affiliated firms after the client has been advised of the possible prejudice or loss of solicitor and client privilege to the working together of both firms on the same matters in respect of which legal advice will be sought and obtained by the client, or where non-lawyer staff of the non-lawyer firm also provide services, including support services, in the affiliated law firm,
k. in circumstances in which lawyers move between the affiliated law firm and the non-lawyer firm in providing legal advice to clients on one hand and professional consulting services on the other, these lawyers should be required to disclose to clients, before being retained, their role in the firms, provide an explanation of when solicitor and client privilege may or may not attach, and give the client an opportunity to make an informed choice with respect to counsel,
l. an affiliated law firm should be required to observe and comply with the current rule of professional conduct on firm names in order to ensure that the public is not misled into believing that non-lawyers are practising or are entitled to practise law,
m. a comprehensive review should be undertaken of and, if required, appropriate amendments or additions should be made to the Society’s Rules of Professional Conduct and relevant by-laws, to address the obligations and responsibilities outlined above as a matter of implementing the regulatory scheme proposed by the Task Force for the affiliated law firm.
2
Law Society of Upper Canada Transcript of Convocation, September 25, 1998, page 218.
I. MANDATE
1. In June, 1999 the Multi-Disciplinary Practice Task Force (“the Task Force”) was assigned the mandate to “deal with the issue of a captive law firm model, to study, amongst other things, the questions of control, trading style, management, conflicts of interest and related matters as recommended”.2
2. The captive or affiliated law firm structure is considered to be one form of multi-discipline practice. A multi-discipline practice may be broadly defined as a business arrangement in which individuals with different professional or service qualifications combine their skills, sometimes to the extent of practising together, to provide advice and counsel to the consumers of these services. Affiliated law practices have sometimes been called “captive” law firms because of the close relationship to the professional services entity with which they are affiliated, but a closer examination of the elements of what might be a “captive” law firm and an “affiliated” one shows that they are different concepts. Used in its proper sense, the term “captive” indicates control or dominance of the law firm despite a semblance of independence. The Task Force, for reasons described in this report, believes that such a law firm would represent too high a risk to the core values of the legal profession and would not be in the public interest. Accordingly, although the term “captive” law firm has gained some measure of common usage, for the purposes of this report, the term “affiliated law firm” will be used.
3. The Task Force, in examining the affiliated law firm as a structure for the practice of law, sought to isolate the key regulatory issues and, if necessary, to propose appropriate regulatory parameters within which the affiliated law firm may operate.
4. This report provides Convocation with
3
This report established a policy on multi-discipline partnerships, and led to the multi-discipline practice model documented in By-Law 25 (April 1999). The by-law appears at Appendix 1.
C details of the Task Force’s work over the past 15 months,
C identification and analysis of the primary regulatory issues examined by the Task Force,
C the conclusions reached by the Task Force, and C proposals for Convocation’s consideration.
II. BACKGROUND TO THE STUDY
5. The Task Force’s mandate arose from Convocation’s consideration and adoption of an earlier report on multi-discipline practices in September 1998.3 In that report, the affiliated law firm structure was noted but not explored in detail. In Convocation’s view, the structure raised issues discrete from the study of an integrated partnership model, and it authorized a separate Task Force to study those issues. The Task Force is chaired by Earl A. Cherniak Q. C., and its members are Larry Banack, Kim A. Carpenter-Gunn, W. Niels Ortved, and David A. Ward. Q. C. (non-bencher member). George D. Hunter also served on the Task Force until June, 2000. Jim Varro acted as secretary to the Task Force.
6. The affiliated law firm in the general parlance of multi-discipline practices and in much of the literature that the Task Force reviewed is generally understood to be a law firm separate from but affiliated with another professional services entity, such as an accounting or professional services firm, for the purposes of joint marketing and delivery of professional services. The firms in the affiliation may, to varying degrees, share physical office space and information systems and equipment, and the associated costs. It is understood that the practices of the law firm and the professional services firm, however, are not integrated. Later in this report, the Task Force defines with more precision, for the purposes of this report, an affiliated law firm, and distinguishes it from what might be described as a captive law firm.
4
The firm since April 2000 has identified itself as Donahue Ernst & Young. That name does not comply with the Law Society’s Rules of Professional Conduct, and the Society is addressing that issue with the firm. For the purposes of this report, Donahue & Partners, or, as indicated, “Donahue”, will be used.
7. The only example of an affiliated law firm to date in Canada of which the Task Force is aware is Donahue & Partners4, affiliated with Ernst & Young. Established in 1996, the Toronto firm has grown to over 80 lawyers and plans to continue its expansion. It also has offices in Calgary and Ottawa, and plans to open offices in Montreal soon. The Task Force understands that other large professional services firms and perhaps others in Canada have been studying similar affiliated law practice arrangements.
8. As an operational affiliated law firm, Donahue & Partners understandably was an important focus of the Task Force’s review. Information about the firm appears later in this report.
III. OUTLINE OF THE TASK FORCE’S WORK
9. The members of the Task Force held ten meetings, in addition to a number of consultation sessions and information meetings with various groups and individuals.
10. In summary, the Task Force has undertaken the following:
C a briefing on the previous multi-discipline practice study completed by the Law Society, which resulted in the by-law on multi-discipline practices adopted by Convocation in April 1999 (By-Law 25);
C review of extensive background information on multi-discipline practices, with a particular focus on studies undertaken in various jurisdictions and by various legal organizations, and information in those studies relevant to the issue of the affiliated law firm;
C ongoing review of current literature, reports (including press reports) and academic treatments of the subject, including monitoring ongoing initiatives or studies undertaken by other organizations relating to the subject of multi-discipline practices and in particular the affiliated law firm;
5
The CBA’s International Practice of Law Committee on Multi-Disciplinary Practices and the Legal Profession prepared a report entitled “Striking a Balance”, presented to the CBA Annual Meeting in August 1999. The report was debated at the 2000 CBA Annual Meeting and adopted. The report states that no distinction should be drawn between “captive law firms” and fully integrated partnerships (of lawyers and non-lawyers) and also states that there be no requirement of control of multi-discipline practices by lawyers.
C publication of a call for input to the profession in the Ontario Reports and on the Society’s website, together with notice of the availability of a background paper (at Appendix 2) on the affiliated law firm structure; a number of copies of the paper were sent to members in response to their requests;
C through seven consultation sessions, meeting with members of the profession to obtain input on issues relating to the affiliated law firm structure for the practice of law; these sessions in small group formats were held on October 25, 1999 (London), October 27, 1999 (Ottawa) and November 2, 1999 (Toronto); material used at the sessions was adapted from the above-noted background paper;
C contacting the “Big 5” chartered accounting/professional services firms in Toronto, with a view to meeting with representatives of the firms to discuss the affiliated law firm structure; the only firm that met with the Task Force was Ernst & Young, together with representatives from its affiliated law firm, Donahue & Partners; C meeting with corporate and in-house counsel to obtain input from their perspectives; C meeting with Thomas Heintzman and Simon Potter of the Canadian Bar Association committee5 examining multi-discipline practices, to exchange information and inform them on behalf of their committee on the Society’s initiative in the area of affiliated law firms;
C meeting with the chair of the Ontario Securities Commission, David A. Brown Q.C., to obtain a perspective from the securities regulator on affiliated law firm developments;
C meeting with Ontario lawyer and businessman Derek Watchorn, working in London, England with a major real estate development company, who has had experience in dealing with lawyers in Europe and indicated a willingness to share his perspective on multi-discipline practice developments there;
6
“Report to Convocation, September 25, 1998, The “Futures” Task Force - Final Report of the Working Group on Multi-Discipline Partnerships”, page 16.
C meeting with lawyers who have worked or are working in the pension and actuarial fields, for their perspective on developments outside of the lawyer/accountant sphere; C meeting with lawyers from Hewitt Associates, in response to information received
from them on the affiliated law firm model.
IV. NATURE OF THE AFFILIATED LAW FIRM
AFFILIATED LAW FIRM DEVELOPMENT
11. Prior to the establishment of Ernst & Young’s affiliated law firm in Ontario, the most significant developments in this area occurred in Continental Europe, England and New South Wales. While there is some variation in the level of integration of the affiliated law firms with the professional services entities, the arrangements are similar.
12. This is not a new phenomenon globally, as noted by the 1998 report of the Society’s earlier study of multi-discipline partnerships:
The expansion of accounting firms, primarily the “Big 5" as they now are known, has been attributed primarily to two factors: the maturation of the auditing/accounting services market and globalization, which includes advances in technology and expansion of specialization in service offerings. Consolidation in the profession followed upon these developments, leading to mergers which saw a number of large accounting firms become even larger, resulting in the Big 5 noted above. The huge growth in the business/consulting practices of these firms, now known as professional services firms, led to an expansion which eventually saw them offering legal advice in the business sectors through affiliated law firms. This occurred most rapidly in Europe.6
13. As Kent Roach and Edward Iacobucci noted in a paper prepared in 1998 for that multi-discipline practice study, and later published in The Canadian Bar Review,
7
Kent Roach and Edward M. Iacobucci, “Multidisciplinary Practices and Partnerships: Prospects, Problems and Policy Options”, (2000) 19 The Canadian Bar Review 1 at p. 12.
8
A notable exception is Germany, which has allowed full partnerships between attorneys, patent lawyers, auditors, accountants, tax advisors and other similar professionals for a number of years.For a detailed analysis of the German experience, see Laurel S. Terry, “German MDPs: Lessons to Learn”, (2000) 84 Minnesota Law Review 1547.
9
“Report to Convocation, September 25, 1998, The “Futures” Task Force - Final Report of the Working Group on Multi-Discipline Partnerships”, page 21.
The greatest growth in captive firms has been in London, England. Arthur Andersen affiliated itself with a start-up law firm, Garret & Co. The law firm, which is a separate entity from Andersen, but is associated with them, went from nothing in 1993 to a firm of 145 solicitors in five offices across England in only 3 years. Price Waterhouse is affiliated with the law firm Arnheim & Co. and Coopers and Lybrand helped establish Tite and Lewis in 1997. As an example of the importance of the relationships between the law and accounting firms, Arnheim & Co. earns 30% of its fees from referrals from Price Waterhouse and believes that this figure will increase. Ernst and Young has signalled its intention also to establish an association with a law firm. Significant integration between lawyers and accountants has occurred in the United Kingdom even without the adoption of a regulatory regime specifically designed for and permitting MDPs.
...
The largest law firm in France, Fidal, is part of KPMG. In Spain, while full MDPs are not permitted, a top law firm, J&A Garrigues, merged with Arthur Andersen's pre-existing law firm to form the largest firm in Spain, J&A Garrigues, Andersen Y Cia.7
14. What was earlier thought to be the arrival of fully integrated legal and professional services practices in Europe - the “full blown” multi-discipline partnership - was in fact the affiliations referred to above.8 As the earlier report stated:
While the firms either incorporate or routinely reference the accounting firm’s trade name, they appear to exist as separate partnerships of lawyers, that is, the partners in the accounting practices do not appear to be partners in the law practices, or vice-versa. Significant integration of services is accomplished through management arrangements and use of the accounting firm’s trading style.9
10
“Preserving the Core Values of the American Legal Profession:The Place of Multidisciplinary Practice in the Law Governing Lawyers”, Report of the New York State Bar Association Special Committee on the Law Governing Firm Structure and Operation, p. 347.
15. The most recent development in North America occurred in Washington, D. C. in November 1999 with the creation of McKee Nelson Ernst & Young, a law firm affiliated with Ernst & Young. According to press articles about the new firm, it was launched with financial assistance from Ernst & Young and plans to market its services to clients with Ernst & Young as a “one-stop shop” for law, accounting and consulting services. The firm started with three partners from the Washington D.C. office of Atlanta-based King & Spalding, and is aiming to expand to 50 lawyers within its first year.
Recent Consideration of the Affiliated Law Firm Structure New York State Bar Association
16. In April 2000, the New York State Bar Association (“NYSBA”) published a report entitled “Preserving the Core Values of the American Legal Profession: The Place of Multidisciplinary Practice in the Law Governing Lawyers”. The report essentially rejected the notion of multi-discipline partnerships of lawyers and non-lawyers, but provided commentary on other forms of multi-discipline practice, including the interprofessional contractual alliances or relationships between lawyers and non-lawyers. They were described in this way:
What the interprofessional alliance represents is the contractual formalization of a reciprocal relationship where two businesses mutually agree that they can service their clients, and benefit themselves by focusing their referrals on each other to the extent consistent with their professional obligations to their respective clients. A byproduct, but not an insignificant one for purposes of this discussion, is that the allies generally make efforts to cooperate in rendering their respective services to the mutual clients. While some might argue that such arrangements fall within the letter of the ethical prohibitions, they are not pernicious in nature because of the responsibility of each of the allies to utilize its best judgment for its clients in selecting the most appropriate “referee”.10
11
Ibid. p. 349.
12
For the full text of the recommendation adopted by the House of Delegates, please see Appendix 3.
...it has become clear that there are lawyers and law firms who wish to proceed aggressively, perhaps more aggressively than the rules of legal ethics will currently allow, in combining their operations through structures resembling interprofessional strategic alliances, but in reality being something dramatically different from the original concept of combining forces to provide cross-referrals and the integration of professional services.11
18. The NYSBA proposed amendments to its Code of Professional Responsibility to address these relationships. In brief, the proposals require that the relationships be limited to other professionals, require that the law firm maintain control of the practice of law, and provide that costs and expenses may be allocated between the lawyers and non-lawyers pursuant to the contract.
The American Bar Association (“ABA”)
19. The ABA’s Commission on Multidisciplinary Practice was created in August, 1998 to study the extent to which and the manner in which professional service and other non-lawyer firms are seeking to provide legal services to the public. The Commission’s final report was presented to the ABA’s House of Delegates at its Annual Meeting in July 2000, where its recommendation to permit fee sharing in an integrated practice between lawyers and non-lawyers was rejected. In its place, the House adopted a recommendation of a number of state bar associations, including the NYSBA, that, inter alia, stated that fee sharing with and control of law practices by non-lawyers is inconsistent with the core values of the legal profession.12
20. In the course of its study, the Commission touched on the affiliated law firm structure. In early 1999, the Commission prepared an outline of five models for multi-discipline practices. Model 4 was called the “Contract Model” and approximates what the Task Force understands to be an affiliated law firm arrangement. It was described in the following terms:
13
ABA Commission on Multidisciplinary Practice, Hypotheticals and Models, p. 4.
14
For the text of the remarks of Mr. Nicolay and Mr. Cochran before the ABA Commission, please see
Appendix 4 .
In this model, a professional services firm would contract with an independent law firm. A typical contract might include terms such as (1) the law firm agreeing to identify its affiliation with the professional services firm on its letterhead and business cards, and in its advertising (e.g., A&B, P.C., member of XYZ Professional Services, LLP); (2) the law firm and the professional services firm agreeing to refer clients to each other on a nonexclusive basis; and (3) the law firm agreeing to purchase goods and services from the professional services firm such as staff management, communications technology, and rent for the leasing of office space and equipment. The law firm remains an independent entity controlled and managed by lawyers and accepts clients who have no connection with the professional services firm.13
21. In hearings arranged by the Commission, interested parties were invited to present their views on and experiences with multi-discipline practices. A number of individuals from the “Big 5" accounting/professional services firms attended, and of particular interest were the attendance of two individuals from law firms affiliated with the Big 5 who provided insight into the operations of these firms. They were Gerard Nicolay, managing partner of Coopers & Lybrand Juridique et Fiscal and chair of PricewaterhouseCoopers in Paris, and Neil Cochran, a partner in Dundas & Wilson CS in Edinburgh, Scotland, a law firm in a network of almost 30 law firms associated with Andersen Worldwide.14
22. The Commission’s final report viewed the development of the affiliated law firm, again with reference to the McKee Nelson Ernst & Young firm, as evidence of the “forces of change” facing the profession. The recommendation adopted by the House of Delegates in July 2000 obviously considered this an issue as well, as it included the following:
FURTHER RESOLVED that the Standing Committee on Ethics and Professional Responsibility of the American Bar Association shall, in consultation with state, local and territorial bar associations and interested ABA sections, divisions, and committees undertake a review of the Model Rules of Professional Conduct ("MRPC") and shall recommend to the House
of Delegates such amendments to the MRPC as are necessary to assure that there are safeguards in the MRPC relating to strategic alliances and other contractual relationships with nonlegal professional service providers consistent with the statement of principles in this Recommendation.
23. The above resolution was based on the state bars’ report which, after noting the NYSBA’s report, stated that “the core values of the profession are at risk if side-by-side arrangements result in any ownership in or supervisory right by nonlawyers over the practice of law”.
Law Society of England and Wales
24. In July 2000, the Law Society of England and Wales reported that its Council would be considering a progress report from its multi-discipline practice working party on “interim solutions” to the multi-discipline practice question as it considers an approach to lifting the ban on multi-discipline practices in that jurisdiction. Two models are proposed.
25. “Legal Practice Plus” is a model which would allow non-solicitors to become partners in a solicitors’ firm, but the business must remain the provision of legal services and services ancillary to legal services. The Law Society would regulate by contract the non-solicitor partners through their agreement to submit to the Law Society’s regulatory powers and to observe the rules of conduct. The solicitor partners will be required, by practice rule, to supervise the non-solicitor partners and ensure that they comply with obligations. Ultimate control of the practice would remain with the solicitors who will (except where there are only two partners) be in a numerical majority. This is very similar to the Ontario multi-discipline practice model in By-Law 25.
26. The “Linked Partnerships” model would permit an independent firm of solicitors to link, for example, with an accounting practice with which a fee sharing arrangement may be made. This model would permit a separate solicitors’ practice to fee-share with another business. The solicitors must retain control of their practice and the relationship with the linked business must be made transparent to clients. This is an affiliated law firm, with the significant right to share fees.
15
“Legal relationship” is defined as “membership of a partnership, or a joint venture which is not a partnership, or membership or directorship of a corporate body”.
16
Law Society of Scotland Report of the Multi-Disciplinary Practices Working Party, January 2000, p. 6.
Law Society of Scotland
27. In June 2000, the Law Society of Scotland’s Council approved a January 2000 report of its Multi-Disciplinary Practices Working Party. The Council endorsed the Working Party’s conclusion that the ban on multi-discipline practices, reflected in the following practice rule, be continued:
Rule 4
A solicitor shall not form a legal relationship15 with a person or body who is not a solicitor with a view to their jointly offering professional services as a multi-disciplinary practice to any person or body.
28. The report based its conclusions on concerns about risks to the legal profession’s key principles or core values. The report, however, had this to say about a structure that appears to be like the affiliated law firm:
...we do not envisage that the same fundamental ethical difficulties arise if a Solicitor simply shares costs rather than fees with non-Solicitors. So long as it is clear to the client at all times the nature, qualifications, and function of the individual professional adviser with whom he is dealing, we see no difficulty in Solicitors sharing premises, computers and other information technology (with appropriate security measures), and even administrative and secretarial support staff. Indeed, provided appropriate steps are taken to avoid any confusion on the part of the client, there is nothing in the Rules of the Society to prevent such an arrangement. The Working Party would encourage any of the Society’s members interested in exploring the possibility of such cost-sharing arrangements to contact its Professional Practice Department to obtain suitable advice on the necessary safeguards.16
Law Society of British Columbia
29. The Law Society of British Columbia has recently commented on the affiliated law firm issue by acknowledging, like Ontario, that the affiliated law firm structure raises questions apart
17
The benchers at their July 7, 2000 meeting adopted a number of recommendations in the report respecting the regulation of multi-discipline practices.
18
Law Society of British Columbia Report of the Working Group on Multi-Disciplinary Practice, June 28, 2000, p. 3.
from a regulatory scheme for multi-discipline practices where lawyers and non-lawyers seek to integrate their practices.
30. The June 2000 report of the Law Society of British Columbia’s Working Group on Multi-Disciplinary Practice, recently presented to the benchers17, included the following on affiliated or captive law firms:
The issues addressed here do not include an analysis of whether we should attempt to regulate captive law firms that comply with our current rules. There may be merit in applying the rules we design to regulate multi-disciplinary practice to captive law firms. However, in our view, we should address that issue after making a separate investigation of the nature of captive law firms that operate or may operate here, and assessing the impact of applying the MDP rules to them.18
IMPETUS FOR THE AFFILIATED LAW FIRM
31. The Society’s 1998 report on multi-discipline practices commented generally on the impetus for the development of multi-discipline practices as integrated practices of professionals and others. The term “one-stop shopping” was noted as a term used by proponents of multi-discipline practices to capture the essence of these integrated service offerings. The inefficiencies of separate and independent practices to address clients’ complex problems were cited in contrast to the efficiencies that were said to be attainable by integration of legal and non-legal services, which also purported to include cost savings and enhanced advice. Further, there was reliance by some, most notably accountants, on the business imperative, which is said to be occurring in the merging legal and accounting needs of business clients, as support for the emergence of a market for integrated services.
19
“Report to Convocation, September 25, 1998, The “Futures” Task Force - Final Report of the Working Group on Multi-Discipline Partnerships”,p. 27.
32. The 1998 report had this to say about the theory of “one-stop shopping”:
While “one stop shopping” has a superficial appeal and certainly bears an obvious message of convenience, the specifics are somewhat more elusive. For clients, it is said that a broadened range of services delivered at a higher level and reduced cost results from the integration of professional skills. Solutions are more rapidly identified, repetitive service steps eliminated and more comprehensive results achieved. Seamlessness is the hallmark. For the service providers, the bottom line is a broadened service offering with an improved competitive position and enhanced profitability. Certainly the current theme is “more work for the lawyer” although the proselytizing in this connection comes largely from other professions seeking to provide legal services on a partnership basis. Ancillary features include a more fulfilling professional experience for all professionals, expanding one’s horizons and the development of more efficient management of professional services. Improved competitiveness for lawyers otherwise confined to smaller firms together with enhanced opportunities for specialization are said to be added benefits. 19
33. The affiliated law firm, as noted earlier in this report, is viewed by some as within the realm of multi-discipline service offerings that can provide some of the efficiencies and enhancements described above. Later in this report, the views of Donahue & Partners are provided on the need for this type of firm. Professional services firms which have established affiliated law practices explicitly refer in their marketing material to the “multidisciplinary approach” to legal problem solving. PricewaterhouseCoopers’ global law practice, Landwell, for example, promotes its services on the basis of a client demand for this approach. Its website information states:
Multidisciplinary working has grown from client demand, as organisations face up to the challenges of working in the global market and of complex business and regulatory environments.
...
Clients are asking us for international solutions, provided cost-effectively and addressing the needs of their business. They are also looking for their
20
Web sites: www.landwellglobal.com/gx/eng/insights/mdps_b_gx.html and
www.landwellglobal/gx/eng/insights/mdps_home_gx.html
provider to steer a clear path for them - through regulatory hurdles, project managements issues, and integration with other professional advisers.20
34. In the course of consultations with a number of lawyers working in different practice and employment situations, the Task Force received varying opinions on the demand for the affiliated law firm as a desired structure for the delivery of legal services. For example, C one lawyer advised that as a sophisticated user of legal services, the choice comes
down to the best lawyer for the job - the person. The decision to engage a lawyer or law firm would not be dictated by the “one-stop shop” idea, but by the best person. It is irrelevant to this lawyer to have a “one-stop shop” for services.
C another lawyer offered that he is not sure that clients are driving the phenomenon, but he believes the accounting firms would not be doing what they are doing if the clients were not buying the services. In his legal practice, he was aware of some corporate clients who saw the “one-stop shop” as a useful way to purchase services, while others said they were sophisticated enough to choose their own individual advisors. C some of the corporate counsel with whom the Task Force consulted indicated that there is no push from the North American corporations for the affiliated law firm, but that it is driven by the accounting firms’ desire to increase business.
C at the sessions with members from various practice areas, the following opinions were expressed:
a. The impetus is from the accounting firms - nothing is coming from the public. Audit work became commoditized in the late 1980s and early 1990s, and profits dropped. To grow, these firms had to expand practices, and they saw the financial opportunity in legal services.
b. The issue seems to be driven by sophisticated clients the big companies -who want to limit legal fees, and -who look to the affiliated firm to control the cost.
c. There is no sense that there is a client need. If there is no need, but clients think there is a need, the marketplace will dictate whether these firms are successful or not.
d. There is a market for this type of service offering to highly sophisticated tax or corporate clients, and there are efficiencies in combining specialists together for specialized services to a fairly narrow market of consumers. e. This development is predominantly about commercial opportunity.
Accounting firms are establishing commercial relationships to sell legal services. There is always a gap to be filled with provision of more efficient, better quality legal services.
f. The major accounting firms that organize these various professional services as a package have a globalized base. They can manage cross-border situations. One-stop shopping appeals to those who like comprehensive services. Some clients want one source for services, others like the appeal of the individual professionals from various firms.
35. The Task Force during its consultations was also informed about a business entity that was contemplating establishing a law firm similar to that of Donahue & Partners. In the proposal for the law firm, generally, no third party legal services would be provided to persons who are not clients of the business entity. It would be a service to the entity’s clientele only, which is comprised largely of mid- to large-size companies. However, it was suggested that the law firm could market itself as having lawyers available to provide advice in specific areas of law. Clients would be advised that they would be working with an independent law firm albeit part of the business entity. The firm would function from the same facility the lawyers use now and would do the same work, with the addition of legal opinions.
36. Based on the above, it is far from clear that a demand by clients initiated the multi-discipline practice developments or in particular the affiliated law firm structure. It may be that the creation of a new product, or manner of delivering services, has found favour with a certain section of clientele, and that to that extent, a demand is being fostered.
37. Another view is that the impetus for the affiliated law firm is simply a strategy on the part of professional services firms to expand their range of service offerings to include legal services. In this context, the strategy is to expand the range of services by promoting the legal services as having the benefit of one-stop shopping, while acting for any clients attracted, whether or not they are attracted by the other service offerings of the professional services firm. While full integration may be the desire, regulatory hurdles and the need to carefully read the market’s preparedness to forego a separate and independent law practice in favour of integrated advice may be affecting movement in this direction.
38. The example discussed above in paragraph 35 of the business entity’s proposal to form a law firm shows the extent to which thinking on the subject has progressed. This type of firm, in the Task Force’s view, would be truly “captive” to its founding entity, servicing only that entity’s clients. Depending on what in-house lawyers in the business entity now provide to the clients of the business, this may be an issue of form over substance, primarily in respect of whether the business entity is seeking to do, through an affiliated law firm, what it cannot do now, and whether the affiliated law firm would be seen in this context as providing truly independent legal advice to the clientele of the firm of which it is captive.
39. In summary, the Task Force is not able to draw any conclusions based on its information or understanding of the demand for the affiliated law firm, other than that opinion varies on the true nature of a demand and that in certain respects clear client demand may be limited rather than expansive.
40. While there may continue to be a debate on whether public demand exists or whether demand is being created by proponents of these structures, the important question for the Law Society, given these developments, is what regulation is required, if any, to ensure that the affiliated law firms operates in a manner that protects the core values of the profession in the public interest. In this respect, the Task Force recognizes that there is an important difference between what the public is interested in and what is in the public interest.
DONAHUE & PARTNERS
41. The Task Force, through the meeting with and submissions by representatives from Donahue & Partners and Ernst & Young and follow up communications, obtained information about the structure and operation of Donahue & Partners. As the firm has been in existence for almost four years, it was crucial that the Task Force understand the firm’s operations and to the extent possible the Task Force used the firm as a basis for an analysis of the regulatory issues.
42. The following is a summary of the non-confidential information the Task Force received orally and in writing from Donahue & Partners and the professional services firm, Ernst & Young in response to a series of written and oral questions put to them by the Task Force. The information is that of the firms alone. The Task Force has not interpreted or otherwise sought independent verification of it.
43. While more detailed information on many of the subjects discussed below was provided to the Task Force by Donahue & Partners and Ernst & Young, the firms considered much of this information proprietary and confidential. As a result, certain subjects in the following section are dealt with in a general way.
44. In the following portion of the report, Donahue & Partners is referred to as “Donahue”, and Ernst & Young is referred to as “E&Y”.
The Firm’s Philosophy
a. Donahue believes that globalization, e-commerce, the speed of decision-making and the ability to purchase international services are causing clients to look differently at the way they need and acquire legal services. Donahue began its practice as a response to a perceived demand from business clients looking for solutions in an increasingly global and complex marketplace. The firm also believes that if clients are not offered a portfolio of choices, they will move to markets where they are available,
and if there are advantages to those services, clients in our market will be at a competitive disadvantage.
The Firm’s Practice
b. The firm offers a broad range of business law services. The firm does not have a litigation department, except for specialized litigation services in such areas as tax and employment law.
c. Donahue does not exist only to be a corporate legal services provider to E&Y’s clients. There are no arrangements requiring E&Y to refer its clients to Donahue or
vice versa. The E&Y client may be offered the alternative of the services of Donahue, but it is left to make its own decision as to where legal services are procured. There are, however, some products or services which are developed on a joint basis by Donahue with E&Y that are marketed on that basis. In that respect, clients may be requested to utilize the services of those who have developed these products or services.
d. In dealing with clients, the relationship between Donahue and E&Y is explained to clients in a manner consistent with the above. The utility of using both E&Y and Donahue is something which is positively addressed as a marketing message, but at all times the client is left with the ultimate decision.
e. Donahue clients are billed by Donahue for the services which it provides. E&Y bills its own clients directly. If a client of E&Y requests that E&Y obtain legal services for the client and Donahue provides the legal services, Donahue bills E&Y which in turn adds the Donahue account to the disbursements which it in turn charges the client.
E&Y
f. E&Y Canada is a member of E&Y International, Ltd., an “umbrella organization” in which each firm of E&Y, including Donahue, is a member. Donahue pays annual membership dues to E&Y International. Its purpose is to provide an umbrella infrastructure to serve clients on a global basis and professional indemnity insurance
